Despite having the best risk management policies and preventative measures in place, the unexpected can still happen in the renewables industry; for the risk manager, this immediately creates a myriad of decisions to be made and questions to ask. The knock-on effect of even a relatively straightforward incident means that many of these decisions need to be made quickly and decisively to bring the business back to pre-loss operating conditions as soon as possible. But at what cost? And, perhaps more importantly, whose cost?
The guiding principle, and one which insurers often communicate early on, is that the Insured should act as if they were a prudent uninsured. However, this can lead to a juxtaposition as to whether the decisions that are made and costs incurred immediately following a loss can ultimately impact the final response from insurers.
Both insurers and buyers are looking for an early determination of the root cause of a loss; the insurers require this to analyse the policy coverage to see if they believe there has been indemnifiable loss. For the Insured, it is vital to understand whether the loss is an isolated incident or whether there may be similar systemic or serial issues experienced across their operating assets.
In the absence of certainty on the definitive cause, the insured, often as a result of other commercial obligations such as Operations & Maintenance/Original Equipment Manufacturers (O&M/OEM) requirements, may be required to put in place a number of additional precautionary measures to inspect other operational assets within the facility, which are not the subject of the claim, as a preventative measure against potential further loss.
Ultimately, the external commercial pressure from shareholders or lenders to take these decisions quickly and carry out pre-emptive actions may lead to wider implications from an insurance response perspective.
Most good broker wordings will include a clause which will create a policy response for Loss Minimisation Expenditure and Temporary Repairs. This is normally sub-limited; however, it would create an indemnity for any expenditure reasonably incurred by the Insured, including the cost of effecting temporary repairs following physical damage, to prevent or minimise imminent or further physical damage to the asset and/or to allow work to continue. This would normally also include expenditure incurred by or on behalf of the insured as a result of emergency action taken where:
This is generally provided so that where such expenditure is not approved in advance by insurers, the liability of insurers does not exceed the amount of saving that the insurers achieved by such expenditure or the sub-limit agreed in the policy, whichever is the greater.
This does mean that when there is a claims event, the Insured is trying to act in the interest of the business as a prudent uninsured, without the benefit of knowing how the claim will develop. Without prior approval of the loss adjusters appointed by insurers, when physical damage has occurred, there is a fund which can be accessed to avoid or mitigate further losses. Where this is the case, there is certainly an argument to be made that these types of additional costs should be considered as part of the claim submission, in so much as they represent reasonable and necessary costs incurred as part of loss mitigation. Therefore early dialogue with insurers and their appointed experts is recommended so that clarity is obtained.
For the insured of course, the most important priority following an incident is to plan for a return to a pre-loss condition as soon as possible, particularly when the impact is not only financial in terms of the costs incurred to return an asset to its pre-loss condition but also in terms of loss of revenue on the balance sheet. There are many examples of significant revenue losses that result from a relatively minor physical damage loss; for most policies, the requirement that must be met for these revenue losses to be indemnified by insurers is physical damage coverage for the loss, irrespective of the quantum.
Let’s take a simple example. Most Business Interruption polices will give the insured cover for expediting expense and increased costs of working, which enable the policyholder to incur additional costs, primarily to resume operations as soon as possible and as a result reduce any revenue loss. Typically, these costs will be subject to an economic limit consideration; however, this analysis is often done as part of the final adjustment and this can have a significant impact on the final insurance recoverability, which may not have been contemplated at the time decisions were made. For instance, the decision to air freight a spare part may be more costly than sea or land transportation, but the savings gained in terms of the revenue loss may be significant and therefore will be the right commercial decision to take for the business. If discussions on possible loss mitigation efforts and likely costs versus savings take place early in the process, this can certainly alleviate some difficult discussions later in the life of the claim and help to manage expectations in terms of the insured’s ultimate recovery.
As we have seen, insurers will generally need to be consulted and their approval secured before it is agreed that there will be a policy response. There are exceptions that minimise losses, such as an emergency fund which can be accessed following physical damage, but this is always subject to a sub-limit. Mostly, insures will need to see that any agreed loss amounts pass their economic test, spending one dollar to save two on the overall adjustment. However, sometimes the policy will include sub-limits following physical damage for air freight. Alternatively, it will include extra expenses, reasonably and necessarily incurred, to temporarily continue the insured’s business as normally as practicable. The decision to have an item air freighted rather than shipped by sea may suit the insured but not be subject to the insurers’ economic test. Similarly, such extra expense may not always meet these tests, although it will certainly be sub-limited. But does the insured always need to consult insurers on every decision made following a loss? In terms of simple obligations, such as retaining damage parts or the selection of repair contractors, this may not always be the case, but certainly where the insured is contemplating committing funds to mitigation efforts it would be prudent to engage in early discussions with insurers to understand the implications of any actions taken.
As we have mentioned, there is always a balance to be struck between mitigation costs being economic in terms of spend and achieving savings. However, at the time that decisions are made it is not always possible to have the foresight to be able to fully evaluate any insurance implications. When the final adjustment of a claim is completed, this is generally with the benefit of hindsight.
Indeed, these decisions often come under more scrutiny from insurers when insurance is taken out for physical damage cover only, thereby removing the insurance implications for agreeing an economic spend to ultimately mitigate any revenue loss.
Swift actions and decisions still need to be taken from a commercial point of view. Furthermore, although not directly impacted, it is still certainly worth engaging with interested parties so that a fuller appreciation of the business drivers can be appreciated.
Chris Ling is a Renewable Energy Claims Specialist at Willis Towers Watson in London. Chris.Ling@WillisTowersWatson.com
